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Capital Gains Chapter-12

Conceptual Approach to Taxes 183

Section Topic covered Rule (For CAF-6 AND ICMAP students)

37 Capital assets

Procedure to determine capital gain 37A 13F & 13H Gains on sale of securities 100B Special provision relating to capital gain tax on securities [with Eight Schedule]

Loss u/s 37 & 37A 11, 50, 51 &

101 Geographical source of capital gains & their taxability

Capital gain exempt from tax Treatment of bonus shares Disposal MCQ’s with solutions Practice questions with solutions ICMAP & CA past papers theoretical questions

For CAF-6 and ICMAP students

1. Definition A gain arising on the disposal of a capital asset by a person in a tax year, (except exempt gain) shall be chargeable to tax under the head capital gains. Taxation of capital assets is split into two categories as: A. Capital assets u/s 37. B. Capital assets u/s 37A. 1.1 Capital assets: [Section 2(10) and 37(5)]

Capital asset means property of any kind held by a person, whether or not connected with a business, but does not include the following: Any stock-in-trade, consumable stores or raw materials held for the purpose of business; Any depreciable and intangible property; or Any movable property [(excluding the capital assets defined in section 38(5)] held for personal use by the person or any member of the person’s family dependent on the person. U/s 38(5) has stated the following are capital assets:

A painting, sculpture, drawing or other work of art;

Jewellery; A rare manuscript, folio or book;

A postage stamp or first day cover;

A coin or medallion; or

An antique. Example: From the following information provided by Mr. Hamid, compute income chargeable to tax under the head “capital gains”. (Ignore holding period of the assets) (a) Profit on sale of finished goods Rs. 100,000. (b) Gain on sale of jewellery Rs.50,000.

CAPITAL GAINS 12 Chapter


184 Conceptual Approach to Taxes

(c) Gain on sale of personal car Rs. 350,000. (d) Gain on sale of Antique Rs.10,000

Solution: Mr. Hamid Computation of taxable income and tax liability: Capital gains: Rs. Gain on sale of jewellery 50,000 Gain on sale of antique 10,000 Taxable income 60,000

Note: Item (a) and (c) have not been considered, as the same are not capital assets.

1.2 Capital assets u/s 37A: Under this section capital assets are termed as securities. Securities include the following:

Shares of a public company,

Voucher of Pakistan Telecommunication Corporation,

Modarba Certificate,

An instrument of redeemable capital: defined in the Companies Ordinance, 1984 includes finance obtained on the basis of participation term certificate (PTC), musharika certificate, term finance certificate (TFC), or any other security or obligation not based on interest, other than ordinary share of a Company, representing an instrument or a certificate specified denomination, called the face value or nominal value, evidencing investment of the holder in the capital of the company on terms and conditions of the agreement for the issue of such instrument or certificate or such other certificate or instrument as the Federal Government may, by notification in the official Gazette, specify for the purpose.

Debt securities means; (a) Corporate debt securities such as TFC’s, Sukuk Certificates (Sharia Compliant Bonds),

registered bonds, commercial paper, PTC’s and all kinds of debt instruments issued by any Pakistani or foreign Company or corporation registered in Pakistan; and

(b) Govt. debt securities such as treasury bills (T-bills), Federal Investment Bonds (FIB’s), Pakistan Investment Bonds (PIB’s), Foreign Currency Bonds, Govt. papers, Municipal Bonds, infrastructure Bonds and all kinds of debt instruments issued by foreign Govt., Provincial Govt, local authorities and other statutory bodies.”

Derivative products: Derivative products means a financial product which derives its value from the underlying or other asset, may be traded on a stock exchange of Pakistan and includes deliverable future contracts, cash settled future contracts, contracts of rights and options.

Public company u/s 2(47) means

A Company listed in Pakistan at the year end; or

A Company in which 50% or more shares are held by the Federal or Provincial Government or a foreign Government or a foreign company wholly owned by a foreign Government or

A unit Trust. Example: Which of the following capital assets are securities?

1. Jewellery

2. Shares of private company

3. Shares of public company

4. Painting

5. Musharika certificates

6. Vouchers of Pakistan Telecommunication corporation

7. First day cover

Solution: Item No. 3, 5 and 6 are securities, whereas the others fall in the definition of capital assets u/s 37.



2. Procedure to determine capital gain: [U/s 37(2), (3) and (4)] 2.1 The gain arising on the disposal of a capital asset by a person shall be computed in accordance with the

following formula:

Consideration received by the person on disposal

(Higher of fair market value or actual amount received) Less: cost of the asset [consist of the following u/s 76(2)] Consideration given for the asset

Incidental expenditure incurred in acquiring and disposing off the asset

Any expenditure incurred to alter or improve the asset

Balance shall be the capital gain or loss

2.2. No amount shall be included in the cost of a capital asset for any expenditure incurred by a person that is or may be deducted under another provisions of the Ordinance or that is referred as inadmissible u/s 21. [U/s 38(4)]

2.3 Where a capital asset (other than immovable property) has been held by a person for more than one year (other than capital assets defined in section 37A) the amount of gain arising on disposal of the asset shall be taken as 3/4th while the balance 1/4th shall automatically be excluded from the taxable capital gain. However if there is capital loss under this section the same shall be fully recognized without the application of said exemption. [U/s 37(3)]

2.4 Capital gain on disposal of immovable property [U/s 37(3) The exemption of 25% on disposal of capital assets is not available to immovable property.

Gain arising on the disposal of immovable property, held for a period up to 2 years, by a person in a tax year, shall be chargeable to tax in that year under the head Capital Gains at the rates specified below:

S. No. Holding period Rate of tax 1. Where holding period of immovable property is up to one year. 10%

2. Where holding period of immovable property is more than one year but not more than two years. 5%

2.5 Where the capital asset becomes the property of the person under a gift, bequest, will, by succession, inheritance, devolution, distribution of assets on dissolution of an AOP, or distribution of assets on liquidation of a company the fair market value of the asset on the date of its transfer or acquisition shall be treated to be the cost of the asset at the time of its disposal. [U/s 37(4A)] (Example B attached) However no gain or loss shall be recognized at the original dates when the capital asset becomes the property of the person under a gift, bequest and will etc. [U/s 79] Example A Following information has been provided by Mr Ali:

Rs. Consideration received on sale of share of a private company 96,000 Purchase price of the shares 20,000 Expenses incurred on purchase of shares 2,000 Expenses incurred on sale of shares 3000

Required: Compute income chargeable to tax under the head “capital gains” assuming:

(a) Holding period of the shares is 8 months.

(b) Holding period of the shares is 15 months.

Solution: (a) Rs. Consideration received 96,000 Less: Cost of shares: Purchase price 20,000 Expenses on purchase 2,000 Expenses on disposal 3,000 25,000 Gain on disposal of shares (totally chargeable to tax as sold within one year) 71,000



Solution: (b) Rs. Actual capital gain as above = 71,000 Taxable capital gain (71,000 x 3/4th) = 53,250

Example B Mr Amir purchased 10,000 shares of a private limited company in tax year 2010 for Rs. 100,000. In tax year 2016 he transferred 5,000 shares to his wife under an agreement to live apart. Further he has gifted to his son 2,000 shares and sold remaining shares for Rs.60,000. Compute taxable income of Mr. Amir under the head capital gain for tax year 2016.

Solution: MR. AMIR TAX YEAR 2016 Rs. Capital gains: 3,000 shares sold for Rs. 60,000 60,000 Less: cost of 3,000 shares sold (100,000 x 3,000 / 10,000) (30,000) Total capital gain 30,000 Taxable capital gain 3/4th of Rs.30,000 22,500 Note: No gain or loss has been recognised on disposal of 5,000 shares to his wife under an agreement to live apart and gift of 2,000 shares to his son.

Example C Following information is related to Mr. K. (All amounts are in rupees)

Capital asset Purchase price

Consideration received on disposal

FMV at the time of sale

Holding period

Shares of private company 50,000 40,000 60,000 6 months House 1 1,000,000 1,500,000 1,500,000 1.5 years House 2 1,500,000 2,000,000 2,000,000 3 years

Assuming he has no other taxable income, compute tax payable by Mr. K. for tax year 2016.

Solution: Mr. K Computation of taxable income and tax liability: Rs. Shares of private company: Consideration on disposal (higher of FMV or actual amount) 60,000 Purchase price (50,000) 10,000 House 1: Consideration on disposal (higher of FMV or actual amount) 1,500,000 Purchase price (1,000,000) 500,000 House 2: (Holding period is more than 2 years, hence nothing is taxable in case of house 2 ______-_____ Income taxable under NTR 510,000 Less: chargeable to tax under SBI 500,000 10,000 Tax liability (Income is below taxable limit), hence tax liability is zero - Tax liability under SBI (500,000 x 5%) 25,000 Total tax liability 25,000



Is asset is a capital asset?

No: Although gain shall not taxable under capital gains but may be taxable as

business income or income from other sources.

Yes: If chargeable to tax

No: The same may be exempt from tax

under 2nd Schedule

Yes: If it is an asset mentioned under

section 38(5)

Yes: No loss will be recognized only gain will be chargeable to tax by taking 25% exemption

on capital gain where applicable.

No: Gain and loss both will be recognized by taking 25% exemption on capital

gain where applicable.

Explanation of section 37 and 38 3. Gain on sale of securities: [U/s (37A), Rule 13A – 13N]

Capital gain on disposal of securities (other than exempt from tax) shall be treated under NTR as SBI from 01 July 2010. Tax shall be charged on capital gain on disposal of capital assets acquired for a period which is less than 24 months at following rates.

The gain arising on the disposal of a security by a person shall be computed in accordance with the following formula:

Gain = (Consideration received by the person on disposal of the security) – (Cost of acquisition of the security)

Gain from capital assets under this section shall not apply on gain on disposal of securities by a banking company or an insurance company.

S. No. Period Tax Year Rate of tax (1) (2) (3) (4) 1. Where holding period of a security is less than 12 months. 2016 15%

2. Where holding period of a security is equal or more than 12 months but less than 24 months.

2016

12.5%

3. Where holding period of a security is equal or more than 24 months but less than four years.

2016 7.5 %

3. Where holding period of a security is equal or more than four years. 2016 0 %

Securities held for a period upto a maximum of one hundred eighty two days (182) and for a period upto a maximum of three sixty five days (365) shall be taken as held for six months and one year respectively.

Capital gain arising on the disposal of any security shall be computed on the basis of First in First out (FIFO) inventory accounting method. However, FIFO method shall not apply in respect of sale of shares purchased on the same trading day. In that case gain or loss shall be computed by applying the average method.

TAXATION OF GAIN ON DEBT SECURITIES FOR COMPANIES (Part I of first Schedule Proviso to Division VII) Capital gain arising from disposal of ‘securities’ shall be treated as a separate block of income. For rate purposes this income is split into two categories, namely, debt securities and all other securities. Tax on gain on disposal of debt securities shall be 32% for companies and for small companies 25% for the tax year 2016.



COST OF ACQUISITION [Rule 13K(d)] ‘Cost of acquisition’ of any security means the market price of the security which the investor pays or would have paid to purchase such security. Besides this general rule, the following principles shall apply while the cost of securities acquired:

Sr. Particulars Cost of acquisition 1. Purchase of shares The market price of the security paid by the investor. 2. Right shares Discounted price at which the right shares are issued. 3. Acquisition through

bequest or inheritance Market price of the security at which the deceased person and or would have paid to purchase such security.

4. Bonus shares Market price of bonus shares immediately following the bonus shares which the investor would have paid to purchases such shares.

5. Initial public offering (IPO) Actual price paid to the issuer.

Special provision relating to capital gain tax [U/S 100B read with Eight Schedule]

Capital gains on disposal of listed securities and tax thereon, subject to section 37A, shall be computed, determined, collected and deposited in accordance with the rules laid down in the Eighth Schedule.

The above provisions shall not apply on the following:-

(a) mutual fund, a modaraba;

(b) Banking company, a non-banking finance company and an insurance company subject to tax under the Fourth Schedule;

(c) a company, in respect to debt securities only; and

(d) Any other person or class of persons notified by the Board.

EIGHT SCHEDULE RULES FOR THE COMPUTATION OF CAPITAL GAINS ON LISTED SECURITIES

1. Manner and basis of computation of capital gains and tax thereon (1) Capital gains on disposal of listed securities, subject to tax under section 37A, and to which section 100B

apply, shall be computed and determined under this Schedule and tax thereon shall be collected and deposited on behalf of taxpayers by NCCPL in the manner prescribed.

(2) For the purpose of sub-rule (1), NCCPL shall develop and automated system. (3) Central Depository Company of Pakistan Limited shall furnish information as required by CCPL for discharging

obligations under this Schedule. (4) NCCPL shall issue and annual certificate to the taxpayer on the prescribed form in respect of capital gains

subject to tax under this Schedule for a financial year: (5) Provided that on the request of a taxpayer of if required by the commissioner, NCCPL shall issue a certificate

for a shorter period within a financial year. (6) Every taxpayer shall file the certificated referred to in sub-rule (4) along with the return of income and such

certificate shall be conclusive evidence in respect of the income under this Schedule. (6) NCCPL shall furnish to the Board within the Board within thirty days of the end of each quarter, a statement of

capital gains and tax computed thereon in that quarter in the prescribed manner and format. (7) Capital gains computed under this Schedule shall be chargeable to tax at the rate applicable in Division VII of

part 1 of the First Schedule. (8) The provisions of section 4B shall apply to the taxpayers under this schedule and taxed at the rates specified

in Division IIA of Part 1 of the First Schedule. 2. Sources of Investment

(1) Where a person has made any investment in the listed securities, enquires as to the nature and source of the amount invested shall not be made for any investment made prior to the introduction of the Schedule, provided that- (a) a statement of investment s is filed with the Commissioner along with the return of income and wealth

statement for tax year 2012 within the due date as provided in section 118 of this Ordinance and in the manners prescribed; and

(b) that the amount remains invested for a period of forty- five days upto 30th of June 2012, in the manner as may be prescribed.



(2) Where a person has made any investment in the shares of a public company traded at a registered stock exchange in Pakistan from the date of coining into force of this Schedule till June 30, 2014, enquiries as to the nature and sources of amount invested shall not be made provided that –

(a) the amount remains invested for a period of one hundred and twenty days in the manner as may be prescribed;

(b) tax on capital gains, if any, has duly been discharged in the manner laid down in this Schedule; and

(c) a statement of investments is filed with the Commissioner along with the return of income and wealth statement for the relevant tax year within the due date as provided in section 118 of this Ordinance and in the manner prescribed.

(3) For the purpose of this rule, amount of investment shall be calculated in the prescribed manner, excluding market value of net open sale position in futures and derivatives, if such sale is in a security that constitutes the said investment.

3. Certain provisions of this Ordinance not to apply The respective provisions for collection and recovery of tax, advance tax and deduction of tax at source laid down in the Parts IV and V of Chapter X shall not apply on the income from capital gains subject to tax under this Schedule and these provisions shall apply in the manner as laid down in the rules made under this Ordinance, except where the recovery of tax is referred by NCCPL to the Board in terms of rule 6(3).

4. Payment of tax collected by NCCPL to the Board The amount collected by NCCPL on behalf of the Board as computed in the manner laid down under this Schedule shall be deposited in a separate bank account with National Bank of Pakistan and the said amount shall be paid to the Board along with interest accrued thereon on yearly basis by July 31st next following the financial year in which the amount was collected.

5. Persons to whom this Schedule shall not apply If a person intends not to opt for determination and payment of tax as laid down in this Schedule, he shall file an irrevocable option to NCCPL after obtaining prior approval of the Commissioner in the manner prescribed. In such case the provisions of rule 2 shall not apply.

6. Responsibility and obligation of NCCPL (1) Pakistan Revenue Automation Limited (PRAL), a company incorporated under the of Companies Ordinance,

1984 or any other company or firm approved by the Board and any authority appointed under section 209 of this Ordinance, not below the level of an Additional Commissioner Inland Revenue, shall conduct regular system and procedural audits of NCCPL on quarterly basis to verify the implementation of this Schedule and rules made under this Ordinance.

(2) NCCPL shall implement the recommendations, if any, of the audit report under sub-rule (1), as approved by the Commissioner, and make adjustments for short or excessive deductions. However, no penal action shall be taken against NCCPL on account of any error, omission or mistake that has occurred from application of the system as audited under sub-rule (1).

(3) NCCPL shall be empowered to refer a particular case for recovery of tax to the Board in case NCCPL is unable to recover the amount of tax.

7. Transitional Provisions In respect of tax year 2012, for the period commencing from coming into force of this Schedule till June 30, 2012, the certificate issued by NCCPL under rule 1(4) shall be the basis of capital gains and tax thereon for that period.

Example: Mr. Adnan sold some shares in tax year 2016. Detail of gain or loss on sale is given below:

Gain / (loss) Rs. (a) Shares of Alpha Chemicals (Pvt.) Ltd. 100,000

(Holding period is 15 months) (b) Shares of Beta Industries Ltd. (Unlisted public Company) (60,000)

(Holding period is 6 months) (c) Shares of Omega Limited (Listed Company) 10,000

(Holding period 9 months) (d) Shares of Delta Limited (Listed Company) 20,000

(Holding period 18 months) Required: Compute taxable income and tax liability for tax year 2016.



Solution: Mr. Adnan Computation of taxable income and tax liability: Rs. Capital gain: Gain on shares of Alpha Chemicals (Pvt.) Ltd. (Holding period is more than 1 year) (100,000 x 75%) 75,000 Loss on shares of Beta Industries Ltd. (Unlisted Public Company) (In case of loss, holding period has no effect) (60,000) Taxable income 15,000 Computation of tax liability: Tax on taxable income (Below taxable limit) Nil Tax on income under separate block of income: Tax on gain on shares of Omega Limited (10,000 x 15%) 1,500 Tax on gain on shares of Delta Limited (20,000 x 12.5%) 2,500 Total tax liability 4,000

4. Loss U/S 37: Capital losses shall be set off against the capital gains only during the same tax year and where such loss is not so set off then the balance loss shall be carried forward for adjustment against capital gain up to six succeeding tax years. If capital gain is exempt from tax then loss from such asset shall have no treatment under capital gain. [U/s38 (1) and (2)] Example: From the following information, compute the amount of capital loss to be carried forward, if any Taxable capital gain 40,000

Capital loss 80,000

Note: Out of given capital loss Rs. 20,000 relates to capital asset that is exempt from tax.

Solution: Total capital loss 80,000 Less: capital loss of exempt capital asset 20,000 60,000 Less: Taxable capital gain 40,000 Capital loss to be carried forward 20,000

No loss shall be recognized on disposal of the assets mentioned below: [U/s 38(5)] (i) A painting, sculpture, drawing or other work of art;

(ii) Jewellery;

(iii) A rare manuscript, folio or book;

(iv) A postage stamp or first day cover;

(v) A coin;

(vi) A Medallion; and

(vii) An antique.

Example: From following information compute taxable income and tax liability of Mr. A.

Rs. Gain on sale of painting 40,000 Loss on sale of jewellery 20,000 Loss on sale of shares of an industrial undertaking in EPZ 10,000

Solution: Capital gain chargeable to tax is Rs. 40,000.

Loss on sale of Jewellery is not recognised.

Loss on sale of shares of industrial undertaking in Export Processing Zone (EPZ) shall also not be recognized as gain on such shares is exempt from tax.



5. Loss U/S 37A: Capital loss u/s 37A shall be set off against the gain from any other security chargeable to tax during the year; It shall not be carried forward as it is treated as a separate block of income. [U/s 37A(5)]

Capital loss adjustment disallowed (Rule 13F) Capital loss adjustment as mentioned above shall not be admissible in the following cases, namely

Wash Sale Where capital loss realized on disposal of a specific security by an investor is preceded or followed in one month’s period by purchase of the same security by the same investor, thus maintaining his portfolio.

Cross Trade Where coordinated reshuffle of securities between two related accounts of the same investor or between two related brokerage houses is undertaken and securities accumulating unrealized losses are sold to related accounts to artificially realize capital losses in one account without actually selling the securities to an outsider.

Tax Swap sale Where the investor having realized loss on a particular security does not repurchase the same security but chooses another similar security in the same sector, thus, not only minimizing or eliminating altogether liability on account of tax on capital gain, but also maintaining the portfolio broadly at the same risk return profile.

There shall be no tax if the securities are held for more than one year;

This section shall not apply to a banking company or an insurance company;

The holding period shall reckon from the date of acquisition to the date of disposal;

Gain under this section shall be treated as a separate block of income.

Payment of tax on capital gain [Rule 13H] Every investor other than individual shall e-file statement of advance tax on capital gain on the capital gain

on the prescribed format within seven (7) days after the end of each quarter with the tax authority.

The liability to pay the due tax on capital gain shall lie on the investor who held the securities during the period for which tax on capital gain is to be paid.

Example: Compute tax payable by Mr. Sabir for the tax year 2016 from following information:

Rs. Gain on sale of shares of Omega Limited (Listed Company) 35,400

(Holding period is less than 6 months)

Loss on sale of shares of Delta Limited (Listed Company) (65,000)

(Holding period is equal to 12 months) Solution: Mr Sabir Tax year 2016 Computation of taxable income and tax liability: Rs. Gain on sale of shares of Omega Limited 35,400

Less: Loss on sale of shares of Delta Limited 65,000

Unadjusted loss on sale of securities (29,600)

No tax is payable by Mr. Sabir as there is loss under separate block of income.

Note: The unadjusted loss on sale of security shall not be carry forward.



Where asset is a capital asset is a

security as defined in section 37A(3).

No: It may be chargeable to tax under

section 37 as given above

Yes: It is chargeable to tax under separate

block of income

Non applicability of section 37A:

a. Securities held for equal or more than 48 months. and

b. Banking and insurance companies etc.

Treatment of losses: Loss shall be set off only against the gain of the person from any other securities chargeable to tax under this section and no loss shall be carried forward to the subsequent tax year.

Example: Compute tax payable by Mr. Jamil for the tax year 2016 from following information:

Rs. 1. Gain on sale of shares of Omega Limited (Listed Company) 20,000 (Holding period is less than 12 months)

2. Gain on sale of shares of Apex Limited (Listed Company) 20,000 (Holding period is equal to 12 months)

3. Gain on sale of shares of Zelda Limited (Listed Company) 20,000 (Holding period is equal to 48 months)

4. Loss on sale of shares of Delta Limited (Listed Company) 20,000 (Holding period is more than 12 months but less than 24 months)

Solution: Taxpayer has the option to adjust the loss on sale of security against gain on sale of any security chargeable to tax during the year. The gain on sale of shares of Zelda Limited is not chargeable to tax because of its holding period. However capital loss on sale of Delta Ltd. shall be firstly adjusted against the gain of Apex Ltd and finally the gain of Omega Ltd. shall be charged tax at 15%.

Explanation of section 37A



Pakistan source & Foreign source capital gain

Geographical source of capital gain Received by Taxability

Pakistan source capital gain [Section 101]: Gain arising on the disposal of shares in a resident company shall be Pakistan-source income.

Resident / Non-resident individual

Taxable [Section 11(5) and (6)] In case of non resident the terms &

conditions of double taxation treaty agreement are also relevant for Pakistan source income.

Foreign source capital gain: Capital gain other than above.

a. Resident Individual Taxable [Section 11(6)]

b. Short term resident [For all foreign source income]

[Section 50] An individual shall be exempt in respect of his foreign-source income which is not brought / received in Pakistan if he is resident only by reason of his employment and he is present in Pakistan for not exceeding 3 years.

c. Returning expatriate [Citizen of Pakistan coming back in Pakistan]

[For all foreign source income]

[Section 51] If an individual citizen of Pakistan (returning expatriate) is resident in the current tax year but was non-resident in the 4 preceding tax years, his foreign-source income shall be exempt in current tax year and in the following tax year.

Non-resident individual Not taxable [Section 11(6)]

6. Capital Gains Exempt from tax: The following capital gains are exempt from tax under Part-I of 2nd schedule:

1. Any distribution received by a taxpayer from a collective investment scheme registered by the Securities and Exchange of Commission of Pakistan including NIT or a Mutual Fund out of the capital gains of the said Schemes. Provided that this exemption shall only e available to only such mutual funds, collective investment schemes that are debt or money market funds and these do not invest in shares U/c (103)

2. Any gain on transfer of a capital asset, being a membership right held by a member of an existing stock exchange, for acquisition of shares and trading or clearing rights acquired by such member in new computerized stock exchange in the course of corporatization of an existing stock exchange. U/c (110B)

3. Exemption on capital gains from units in Special Industrial Zones U/c 113 has been omitted from tax year 2016.

4. Any income from sale of shares of an industrial undertaking set up within the meaning of the Export Processing Zone Authority Ordinance. U/c (114)

7. Treatment of bonus shares Under the Companies Ordinance, 1984 a company may issue the following three ways to issue the share:

1. Shares issued for cash

2. Shares issued for other than cash

3. Issue of shares without any consideration (Bonus shares) The taxation of bonus shares of listed companies are covered under the head income from other sources u/s 39 and to be taxed @ 5% under section 236M on market price on the first day end price on closure of books. However the Board has reserved the right to prescribe the taxation on bonus shares from unlisted and Private Ltd. Companies.

8. Disposal The legislature intentionally used the word of disposal and it had not used the words of “gain on sale”. The reason to use the term is that the term disposition is wider connotation than sale. It includes exchange, relinquishment and extinguishments in addition to sale. This is evident from the explanation of disposal given in u/s 75 of the Ordinance.



Sales Ordinary sale involving transfer of assets in lieu of any consideration.

Disposition In relation to a property means disposition made by deed or will and also made by or under a decree or under orders of court Tribunal or Authority.

Exchange Where transferee does not bring cash but something else in exchange.

Relinquishment of an asset Firm purchases right to manufacture a certain brand and of goods, on dissolution one partner relinquishes the right to that license for a consideration.

Extinguishments of a right Say three partners of a firm hold right in goodwill. Two partners on dissolution surrendered their right in favor of third Partner



MULTIPLE CHOICE QUESTIONS Q.1. Gain arising from the disposal of _________ is taxable under the head capital gains.

(a) Depreciable asset (b) Eligible depreciable asset (c) Securities (d) All of the above

Q.2. ____________are capital assets. (a) Stock in trade (b) Sculpture (c) Immovable property (d) Both b and c

Q.3. A person who derives his income by dealing in shares of private, unlisted and public limited companies are covered under the head. (a) Income from business (b) Income from other sources (c) Capital gains or (d) All of the above

Q.4. A loss on the disposal of _______ is not recognized under the Income tax Ordinance, 2001. (a) Securities not chargeable to tax (b) Medallion (c) Both (a) and (b) (d) None of (a) to (c)

Q.5. Bonus shares are issued by a company to its ______ without receiving any amount from them. (a) Employees (b) Customer (c) Shareholders (d) All of the above

Q.6. Where a capital asset (other than securities and immoveable property) is disposed off after one year of its acquisition, then gain for tax purposes is ______ of actual gain. (a) ¼ (b) ½ (c) ¾ (d) None of (a) to (c)

Q.7. Income from Modaraba certificates is now taxable under section _________. (a) 37 (b) 37A (c) 38(5) (d) none of (a) to (c)

Q.8. Income from shares of a public company set up in any special Industrial zone is exempt up to-------- years from the date of commencement of commercial production. (a) Three (b) Four (c) Five (d) None of the above

Q.9. Gain from sale of shares of Private Limited companies is taxable under section_________. (a) 37 (b) 37A (c) Not taxable (d) None of (a) to (c)



Q.10. Bonus shares are the shares issued by a company_____________. (a) Free of cost (b) Issued at concessional rate (c) On credit (d) None of the above

Q.11. A deduction of loss u/s 37A on disposal of security chargeable to tax may be adjusted against the capital gain of ____________. (a) Any other security not chargeable to tax (b) Any other security chargeable to tax (c) Shares of (Pvt.) Ltd. company (d) None of the above

Q.12. A company in which at least 50% of the shares are held by a foreign government is ___________. (a) Private company (b) Public company (c) Foreign company (d) All of the above

Q.13. Any incidental expenditure on disposal of capital assets shall form part of _____________. (a) Cost of assets (b) Disposal consideration (c) Selling cost (d) None of a to c

Q.14. Capital loss u/s 37 is allowed as deduction for those assets the gain of which is___________. (a) Chargeable to tax (b) Exempt from tax (c) Both of these (d) None of (a) to (c)

Q.15. At the time of devolution ___________ would be the cost of the asset. (a) FMV (b) Historical cost (c) higher of a and b

Q.16. Medallion received as gift and disposed off later, the capital loss on the same shall________. (a) be recognized (b) not be recognized

Q.17. Expenditure that shall form part of the cost of the asset are __________. (a) Any expenditure to earn such income (b) All the expenditure excluding expenditure inadmissible u/s 21 of the ITO, 2001. (c) None of the above

Q.18. Tax on capital gain shall be charged on capital gain arising from debt on securities u/s 37A w. e. f. (a) 01-07-2014 (b) 01-07-2013 (c) 01-07-2012

Q.19. Capital gain tax shall not be chargeable on disposal of securities which are held for a period of __________. (a) one year (b) two years (c) three years (d) six months (e) forty eight months

Q.20. ‘Derivatives’ is a general term for financial assets that are “derived” from other_______________. (a) fixed assets (b) current assets



(c) financial assets (d) income

Q.21. Any distribution received from NIT or a Mutual Fund of ICP out of the Capital Gains on which tax has already been paid are___________________. (a) Permanently exempt (b) Fully Taxable (c) Chargeable to tax

Q.22. Which one of the following is not a ‘security’ _______________. (a) share of a public company (b) voucher of PTC (c) Modaraba Certificates (d) Lease hold right

Q.23 Gain on disposal of immovable property is chargeable to at _____%, where holding period is up to one year. (a) 10 (b) 2 (c) 6 (d) 12

Q.24 Where a capital asset under section 37 is sold after one year, ________ of gain on such assets is exempt from tax. (a) 50% (b) 25% (c) 75% (d) 100%

Q.25 A loss on the sale of jewellery is _______ under the head capital gain. (a) recognized (b) not recognized (c) taxable (d) none of above

Q.26 Redeemable capital instruments are chargeable to tax under section _____. (a) 37 (b) 38 (c) 37A (d) 39

Q.27 In case capital assets are acquired through inheritance, the FMV on the date of ________ is treated as cost of assets. (a) disposal (b) acquisition (c) destruction (d) all of above

Q.28 Profit on sale of personal car is taxable under the head _______. (a) income from salary (b) income from property (c) income from business (d) none of above

Q.29 Where a security has been disposed off within twelve (12) months from the date of its acquisition the rate of tax shall be higher as compared to the rate applicable after _________months. (a) 12 (b) 5 (c) 1 (d) none of above



Q.30 Holding period of security and other capital assets _______ on the taxability of capital gain on their disposal. (a) have no effect (b) have effect (c) none of above

Q.31 Rates for taxability of capital gains under section 37A for AOP and individuals are____. (a) different (b) equal (c) none of above

Q.32 Capital gain is _______ where transfer of assets between spouses under an agreement to live apart, under a gift, bequest or will, by succession, inheritance or devolution and distribution of assets on dissolution of an AOP or on liquidation of a company. (a) taxable (b) exempt (c) not recognized (d) none of above

Q.33 The unadjusted capital loss under section 37 can only be carried forward upto the period of ___ years immediately after the year of occurrence for adjustment against income from capital gain only. (a) seven (b) three (c) six (d) ten

Q.34 Loss on securities chargeable to tax can be carried forward to subsequent ___ tax years. (a) seven (b) three (c) six (d) none of the above

Q.35 When a capital asset is disposed of within one year, _____ of gain is taxable. (a) 100% (b) 75% (c) 25% (d) 0%

Q.36 Provisions of section 37A are not applicable to _________. (a) an insurance company (b) a banking company (c) both ‘a’ and ‘b’ (d) none of above

Q.37 An option to buy a __________ is a derivative. (a) treasury bond (b) shares (c) debentures (d) all of above

Q.38 Capital loss under section 37 may not be adjusted against the capital gain under section ______. (a) 37 (b) 38 (c) 37A (d) all of above

Q.39 _______ received as gift shall be chargeable to tax. (a) medallion (b) old coin (c) painting (d) none of above



ANSWERS

1 (c) 2 (d) 3 (c) 4 (c) 5 (c) 6 (c) 7 (b) 8 (d) 9 (a) 10 (a) 11 (b) 12 (b) 13 (a) 14 (a) 15 (a) 16 (b) 17 (b) 18 (a) 19 (a) 20 (c) 21 (a) 22 (d) 23 (a) 24 (b) 25 (b)

26 (c) 27 (b) 28 (d) 29 (a) 30 (b)

31 (b) 32 (c) 33 (c) 34 (d) 35 (a)

36 (c) 37 (a) 38 (c) 39 (d)



PRACTICE QUESTIONS WITH SOLUTIONS Q # 1 An individual has disposed off his shares holding in different companies as per following details:

Company No of Shares Cost of Acquisition Rupees Per Share Disposal Consideration Rupees Per Shares

ABC Limited 10,000 35 55 (sold within 12 months) XYZ Limited 5,000 40 30 (sold after 12 months but before 24 months) MN (Private) Limited 15,000 100 140 HN (Private) Limited 20,000 50 45 PN (Private) Limited 10,000 50 75

Required: Compute the amount of capital gain for the tax year after considering the following information:

1. ABC Limited and XYZ Limited are listed companies.

2. Shares of MN (Private) Limited were disposed after two years of purchases.

3. Shares of PN (Private) Limited were kept by the person for 6 months.

Solution Capital gain on shares of listed companies (Separate Block of Income):

Rs. Gain on shares of ABC Limited (10,000 x (55 – 35)) 200,000 Loss on shares of XYZ Limited (5,000 x (30 – 40)) (50,000) Capital gain 150,000 Tax on above capital gain @ 15% (Separate block of Income) 22,500

Capital gain on shares of (Private) limited companies:

Rs. Gain on shares of MN (Private) Limited (15,000 x (140 – 100)) x 75% 450,000 Loss on shares of HN (Private) Limited (20,000 x (45 – 50)) (100,000) Gain on shares of PN (Private) Limited (10,000 x (75 – 50)) 250,000 Capital gain 600,000

Q # 2 Mr. Z owns different assets the detail of these assets along with mode and value of acquisition and nature of transaction is as under:

During the year, Mr. Arshad brother of Mr. Z gifted 5,000 shares of M/s ABC (Pvt.) Limited to Mr. Z. Mr. Arshad purchased these shares at Rs.100 per share. Mr. Z sold these shares for a sum Rs.625,000 as on 15 June, 2016. The fair market value at the date when gift received was Rs.135.

Mr. Z has also paid a sum of Rs. 40,000 for purchase of a one Kanal plot in EME Society Lahore. Mr. Z has fortunately succeeded in balloting and has was provided the opportunity to pay the instalments for the allotment of plot. Mr. Z paid first instalment of Rs.100,000 on January 2016. However, Mr. Z felt that he would not be able to pay the further instalments, therefore he sold that plot entitlement to Mr. S for a sum of Rs. 250,000 on June 27, 2016.

Mr. Z has also 10,000 shares of XYZ Limited, a listed company, which were transferred to him through inheritance from father. The face value of these shares is Rs.10 per share and his father was originally allotted these shares. Mr. Z sold 2,000 shares out of them at Rs.30,000 on January 30, 2016. The price ruling in the market on the date of sale was Rs.20 per share.

Mr. Z also has a habit of collection of postage stamps. His collection includes 2,000 stamps countries and occasion. He collected these stamps in many years. The cost of these stamps aggregates to Rs.275,000. However, due to paucity of space in the home, he is not able to continue this habit therefore he sold these stamps for sum of Rs.500,000 in a stamp exhibition.

You are required to compute taxable income of Mr. Z for tax year 2016.

Solution Rs. Rs. Shares of ABC (Pvt.) Limited: Consideration received 625,000 Less: Fair market value on date of gift deemed as cost (5,000 x 135) 675,000 (A) Sale of rights in the plot Consideration received 250,000 Less payments made 140,000 Taxable capital gain (B)

(50,000)

110,000



Stamps: Consideration received 500,000 Less: Cost 275,000 75% taxable (C)

225,000 168,750

Taxable capital gain (A+B+C) 228,750 Capital gain on shares of XYZ Limited (Separate Block of Income): Consideration received 40,000 Higher of: Actual or fair market value (30,000 or 40,000) Less: cost (10 x 2,000) 20,000 (Assumed that fair market value on date of transfer is Rs.10 per share) 20,000

Q # 3 Mr. Shahbaz a resident individual earned Rs 650,000 from the sale of assets as shown below:

PURCHASE SALE GAIN / (LOSS) Rs DATE PRICE (Rs) DATE PRICE (Rs)

Shares of Listed Company 10-12-14 350,000 31-7-15 200,000 (150,000) Shares of Unlisted Company 15-7-14 500,000 30-11-15 900,000 400,000 Jewellery 15-5-14 750,000 20-12-15 1,400,000 650,000 Sculpture 01-7-13 400,000 31-01-16 300,000 (100,000) Shares of private company 01-01-14 1,300,000 15-02-16 1,200,000 (100,000) Shares of Listed Company 31-12-14 250,000 30-6-16 200,000 (50,000)

Required: Discuss the treatment and implications of each of above transaction under the ITO, 2001.

Solution

Capital assets u/s 37A Rs. Loss on shares of listed companies (150,000 + 50,000) (200,000) Loss (200,000)

Capital loss u/s 37A can neither be adjusted against gain realized u/s 37 nor can it be carried forward.

Capital assets u/s 37

Gain on shares of unlisted company (400,000 x 75%) 300,000 (Holding period is more than one year) Gain on jewellery (650,000 x 75%) 487,500 (Holding period is more than one year) Loss on sculpture (Loss of this capital asset is not recognized) - Loss on shares of private company (100,000) Total gain u/s 37 687,500

Q # 4 Explain the following with reference to Income Tax Ordinance, 2001.

(i) Capital assets (ii) Valuation of Capital assets (iii) Capital gains (iv) Adjustment of capital loss against capital gains.

Solution (i) Capital assets

There are two categories of capital assets: 1. Capital assets other than specified in section 37A, 2. Capital assets specified in section 37A.

(a) Capital assets other than specified in section 37A.

Capital asset has been defined as property of any kind, connected with business or not, but does not include:

(i) Stock in trade, consumable stores or raw materials held for business

(ii) Depreciable asset or amortizable asset (i.e. fixed assets and intangibles for business use)

(iii) Immovable property

(iv) Movable property held for personal use of the person or any dependent family member excluding capital assets mentioned in section 38(5)

(b) Capital assets specified in section 37A.

A separate section 37A has been introduced by the Finance Act 2010 to cater the disposal transactions of the following securities:

(i) Shares of a public company;



(ii) Vouchers of PTCL;

(iii) Modaraba certificates

(iv) An instrument of redeemable capital, debt securities as defined in the Companies Ordinance 1984; and

(v) Derivative products

(ii) Valuation of Capital assets: If a person receives a capital asset under Gift, Bequest, Will, Succession, Inheritance, Devolution, Dissolution of AOP or Liquidation of Company, then fair market value on date of transfer shall be treated as cost of the capital asset while in other cases value of capital asset shall be equal to its purchase price.

(iii) Capital gain: Capital gain is computed as consideration received less cost of the capital asset + expenses incurred exclusively for earning capital gains (including incidental expenses for acquiring and disposing the capital asset).

Consideration received is the higher of actual amount received or fair market value. In case, an asset is lost or destroyed, consideration received shall be scrap value along with any compensation, indemnity or damages received under an insurance policy, agreement, settlement or judicial decision.

(iv) Adjustment of capital loss against capital gains: Capital loss can be c/f only against future capital gains up to 6 years next following the tax year in which the loss occurred.

Loss on disposal of securities u/s 37A shall be set off only against the gain from any other securities u/s 37A and any unadjusted loss shall not be carried forward to the subsequent tax year.

Q # 5 Briefly explain the income tax implications in respect of each of the following independent situations for the tax year 2016

(a) Mr. Mobeen has also paid a sum of Rs. 60,000 for purchase of dining table set on 15 January 2002 for his personal use. He sold the said set to Mr Gufran for a sum of Rs. 90,000 on 27 June, 2016.

(b) 15 February 2016 Bilal discarded a machine which he had imported from China for Rs. 1,000,000 on 1 January

2016 to start the business. However, the machine was badly damaged during the shipment, rendering it unfit for use. The shipping company paid him Rs. 850,000 as damages. The scrap value of the machine on the date it was discarded was estimated to be Rs. 200,000. The documentation charges incurred in connection with the claim for damages were Rs. 25,000

(c) On June 15, 2016 Imran sold his personal car for Rs. 1,500,000. The car has been originally purchased for Rs. 1,200,000 on September 13, 2013.

Solution: (a) Sale of dinning table set

Although there is gain on sale of dinning table of Rs. 30,000. However any movable property for personal use, except for painting, sculpture, drawing, jewellery, rare manuscript, folio, book, postage stamps, first day cover, coin, medallion or an antique, is not chargeable to tax.

(b) Disposal of machine

Since Bilal was not entitled to claim depreciation on this machine, the machine falls within the definition of a capital asset. [S.37(5)(b)] Discarding an asset is also treated as a disposal of the asset. [S.75(3A)] The capital gain is determined as:

Rs. Consideration received 15 February 2016 Damages from the shipping company 850,000 Scrap value of the machine 200,000

1,050,000 Cost of the machine on 1 January 2016 Purchase price of the machine 1,000,000 Documentation charges incurred 25,000

(1,025,000) Capital gain 25,000 Since the disposal was made within one year of acquiring the asset, the full amount of capital gain is taxable. [S.37 (3)]

(c) Sale of personal car A moveable asset in the personal use of the taxpayer is not a capital asset. Therefore, the gain is not taxable [Ref. Sec 37(5)(d)]



ICMAP PAST PAPERS THEORECTICAL QUESTIONS

Q. NO. 7 (b) WINTER 2005 State the five capital assets for which loss on disposal is not allowed to be recognized / claimed under Income tax Ordinance, 2001. Q. NO. 8 (a) WINTER 2004 Explain the provisions of Carry forward of capital losses under the Income tax Ordinance, 2001.



CA MOD C PAST PAPERS THEORECTICAL QUESTIONS Q.NO.3 Autumn 2014 Zaman is working as the Chief Executive Officer in Yasir Limited (YL). Following are the details of sale and purchase relating to his capital assets during the tax year 2014.

(b) He sold 24,000 shares of HQ (Pvt.) Limited on 30 June 2014 for Rs. 200 per share. He had acquired these shares as follows:

18,000 shares were purchased at Rs. 55 per share on 25 June 2013. 6,000 shares were allotted as bonus shares on 28 February 2014.

(c) A gain of Rs. 300,000 was realized on the sale of shares of Zeeshan Industries Limited (ZIL), a public listed company, in June 2014. The shares were acquired on 31 May 2013.

(d) Zaman sold a painting to his brother on 23 March 2014 for Rs. 1,800,000. Zaman had purchased this painting for his residence, in an auction for Rs. 2,000,000 on 10 July 2011.

(e) He sold his old furniture to Furqan for Rs. 285,000 on 25 June 2014. The furniture was purchased in 2012 for Rs. 250,000.

Required: Compute the amount to be included in the taxable income of Zaman for the tax year 2014 and specify the head of income under which the income would be classified.

Q.NO. 6(a) Spring 2010 Explain the term “Capital Assets” as referred to in the Income tax Ordinance, 2001.

Q.NO. 6(a) Spring 2007 Under the Income tax Ordinance, 2001, a deduction for capital loss is allowed when consideration received on disposal of a capital asset is less than its cost. What are the exceptions to this rule?

Q.NO. 4(b) Spring 2005 Discuss which assets are not considered capital assets for the purpose of determining income under the head Capital Gains. Q. NO. 4(b) April 2005 Discuss which assets are not considered capital assets for the purpose of determining income under the head capital gains.

Q. NO. 2(i) March 2000 state the basis of taxation regarding capital gains.

Q. NO. 4(a) March 1999 Explain the procedure for computation of capital gain.

Q. NO. 4(b) April 1998 Explain the basis of chargeability under the head capital gains.

NOW SOLVE FOLLOWING NUMERICAL QUESTIONS OF MODULE C / AFC PAST PAPER RELATED TO THIS TOPIC Q. NO. 3(III) & (IV) AUTUMN 2013

Q. NO. 5(A) AUTUMN 2012

Q. NO. 6(B) SPRING 2010

Q. NO. 3(A) AUTUMN 2007

Documents

Chapter-12 CAPITAL GAINS - nbandco.comnbandco.com/TaxationBook2016/Income Tax - For CA... · Capital Gains Chapter-12 Conceptual Approach to Taxes 183 ... Jewellery; A rare manuscript,